Thursday, 8 August 2013

The Case for a BrExit

On most matters UK political leaders tend to agree on rather more than they disagree on. The conservative party (aside from an obscure fringe), largely supports the welfare state, free healthcare provision (albeit with an emphasis on internal markets) and some Keynesian support for the economy during a downturn. Meanwhile the labour party is unlikely to support the levels of tax previously seen in the 70s nor repealing the union legislation laid down by Thatcher. This reflects the will of the majority of the population.

However in UK politics there is one areas where we have the slightly paradoxical situation where all three major parties in the UK are at odd with a large section of the UK public, namely the UK position inside the EU. A substantial proportion of the British public are skeptical about the EU to the point of hostile. Superficially this would seem to be a failure of UK democracy or a sign that our "liberal elite" are out of touch with the voters. However a closer look at the opposition to the EU shows that they have diverse and mutual inconsistent positions.

The Socialists/Protectionists

The first group are the socialists/protectionists. Initially much of the opposition to EU membership came from the left of the political spectrum with the Labour party being largely anti-EU. The common market was not seen as inherently favouring free markets and therefore not vehicle for driving their socialist agenda. Equally many labour supporters were instinctively nationalistic with a strong belief in the commonwealth and hence not particularly predisposed towards Europe. Still to this day there are those (such as Owen Jones) on the hard left of the labour movement who are hostile to Europe on the basis of its "neo-liberal agenda" . This is however now a minority position in the labour parliamentary party now, as it has dropped hard left positions and adopted a less hostile view of the EU. 

However arguably much of the recent anger at the EU has been based on the arrival of new immigrants from Eastern Europe (and the perception that they are driving down UK wages). Such objections are against the free movement of labour can be seen as inherently protectionist. Equally the common refrain amongst anti Europeans is that we have a trade deficit in goods with the EU and hence we would be better off out. This argument implies that trade barriers would work in the UK favour as it would deprive the EU of the lucrative UK market and that we would not miss European imports. Ironically the party that has best channeled this anger, UKIP, describes themselves as libertarian (which should in theory make them both pro market and pro free movement of people).

The "Libertarians"

The libertarian case against the EU almost the exact opposite of the socialist case against the EU. Libertarians in theory believe in the free movement of goods and people as little intervention from government as possible. In theory therefore the EU should be seen as a good thing by such people. However the libertarian opposition to the EU is based on three tenets: - 
  • The EU is protectionists (blocking trade with growing markets outside the EU)
  • The EU over-regulates preventing UK businesses from being as competitive as they would be outside the EU
  • The UK could get bilateral deals and use the WTO to negotiate better deals with both the EU and other countries around the world
These anti-EU arguments are given the most credibility by the UK media and are used extensively by UKIP and the anti-EU elements of the Tory party.

The Populists

There are several strands to the populist arguments against the EU. The classic argument broadly that
  • the EU is creating rules that hold the UK back and prevent the UK from building a "new Jerusalem".
  • British (liberal) elites have been "seduced" by the EU and failed to "do what's right" (ie leave). 
  • They also like to point to a majority the British public opposing EU membership. 
  • They also claim the EU membership is expensive (which compared to household budgets it definitely is but as a proportion of the UK budget it isn't)
  • A standard populist argument is that we have a trade deficit (which given many populists have libertarian leanings seems a deeply ironic)
Effectively the case combines a strong patriotic call to arms (against the nefarious others blocking the UK),  ad populem argument and a belief in a corrupt elite. Often the details beyond this are sketchy (and depending who is making the case will vary). They are based on the assumption that on leaving we will have the ability to dictate our terms to the EU. The typically combine "libertarian" positions (e.g. deregulation of the UK to aid growth) with seemly contradictory positions on immigration.

The Sovereign-ists

This group believe that UK sovereignty is paramount and that all UK legislation should be written in the UK parliament. They take great offence at any legislation that "imposed" from the EU. They do not necessarily have a vision for how the UK should use its specific power. The Soverign-ist is necessarily tied to any specific camp (although often they can be linked to the populist camp based on the perception that meddling bureaucrats are holding us back). However for some the principle of sovereignty is paramount (even if that means loss of trade and influence).  

The Challenge for those support BrExit

Given the agendas of the BrExit supporters are so diverse perhaps the more interesting question what would actually happen if the UK did actually leave the UK. Its difficult to see how such diverse groups of people (who all believe they will gain from leaving the EU will be satisfied by the any outcome).

Its likely that the populists will quickly become disillusioned with the new status quo as leaving the EU is unlikely to usher in a new era of prosperity, as many seem to believe. Leaving would potentially put a lot of investment at risk (due to the uncertainty around our future) and even if it does not actively deter investment its unlikely to lead to any quick dividends.

Negotiations with the EU are likely to be difficult for the UK, as the UK is more reliant on trade with the EU than EU nations are on aggregate with the UK (approximately 50% of UK trade is with the EU whereas France and Germany have less than 10% of their trade with the UK). This imbalance (caused by a large bloc and a much smaller nation) is likely to mean that the UK will not be negotiating from a position of strength (the balance of trade in goods argument is really not that significant).  Consequently its likely the UK would face a difficult choice of implementing much of the current body of EU legislation - as do Norway and Switzerland through bilateral agreements - or putting such trade at risk. Any compromises which involve implementing EU rules are unlikely to please sovereignists.

The socialists and protectionists are unlikely to get exactly what they desire either. The UK (unlike countries such as Australia, Norway and Canada) has a large population and relative few valuable natural resources. Trade is therefore essential for the UK if it is to maintain current standard of living. However, such policies are unlikely to be popular with the electorate. Last time the labour party adopted hard left policies (under the leadership of Michael Foot) it convincing lost the election. The labour party only started to increase its share of the vote after Neil Kinnock, John Smith and Tony Blair moved the party significantly towards the centre ground. Socialists who leave the EU may find that there are policies (such as attempts to regulate the flow of foreign labour) may have some resonance. However trade barrier to deter people from buying foreign goods (e.g. foreign cars) are likely to be unpopular. In any case implementing protectionist legislation is likely to result in a similar response from our former EU partners (given the high volume of trade with the EU this could be crippling for the UK economy).

The Libertarian Issues

The anti-EU argument that is given the most "credibility" is what can loosely be described as "libertarian". There are many pundits of offering varying degree of credible analysis claiming that the EU is a bureaucratic monstrosity holding the UK back. The key core elements to this "libertarian" view of the EU are: - 
  • The EU is excessively protectionist (compared with the rest of the world)
  • There is scope to negotiate good trade deals with the rest of the world outside the EU using the WTO
  • The EU protectionist regulation wouldn't be used against Britain if it left
The validity of these arguments cannot really be assessed without looking at the role the WTO plays. Broadly speaking the WTO deals with the rules of trade and settling disputes. It remit is broadly pro-free trade although with some important caveats about where free trade may be detrimental to development, the environment and health. WTO member are therefore able to set their tariffs at the level they want, however, they are unable to arbitrarily raise them above the agreed maximum tariffs. This is all very good, however, its not anything like customs union.

Looking at the statistics generated by the WTO (see link) you can see the differing tariff profiles for different countries. Below is the WTO analysis of the tarrifs for the EU,Australia, Canada, India, China Norway, Switzerland and USA. The analysis looks at a range of different product (e.g. food, chemicals) and looks the tariffs that are applied: -
  • The Bound Duties - % of duties that have fixed upper tarrifs (confirming to WTO)
  • The Simple average Duties - the average duty free (as a percentage of the product cost)
  • % Duty Free - the number of categories that are duty free
  • Non ad valorem duties - the number of lines with duties that are not based on value (e.g. based on weight or quantity instead)
  • Duties > 15% - the number of categories that have duties higher than 15%

Country/Territory Bound Duties Simple average Duties % Duty Free Non ad valorem duties Duties > 15%
European Union 100 5.3 27.2 4.7 4.3
Australia 97.1 2.8 48.8 0.2 0.1
China 100 9.6 7.5 0.5 14.6
Canada 99.7 4.5 71.4 1.6 7.1
India 73.8 12.6 3.5 5.0 16.5
Norway 100 7.8 88.6 6.8 5.5
Switzerland 99.7 7.8 20.2 79.7 5.8
United States 100.0 3.5 45.4 8.2 2.8

The figures above could (depending on which statistics you prioritise) be used to make an argument for a the EU being more protectionist that it should be. The analysis will come out different depending on any weighting (e.g. relatively to level of trade etc). Also there ignore many of the other complexities of trade (e.g. use of technical regulations as trade barriers). However the statistic do not obviously support an overly protectionist Europe.

After leaving the EU, the EU could potentially apply the maximum trade tariffs on UK imports. Whilst the tariffs typically are not that high they could hurt export industries which may conclude it is easier to pull investment from the UK and enjoy friction free within the EU by relocating. A libertarian government keen to avoid EU regulation would face the dilemma putting significant export industries at risk or adhering to EU regulations that they disagree with.

They would also face a similar challenge when negotiating with the rest of the world - should they lower UK tariffs to get the benefit of cheaper imports or should they try to negotiate bilaterial agreements that give UK producers access to foreign markets. The libertarian position should always be to lower tariffs however cutting UK tariffs without getting commitments from other countries would not impress potential exporters. They could cut tariffs and hope that other nations respond in kind, but this assumes that other nations would (arguably the trade policy equivalent of unilateral disarmament from CND). If a libertarian government were to hold off reducing our tariff barrier until we have managed to get a series of bilateral agreements in place, then it might take time to make significant progress (given the speed of international diplomacy). One challenge would be to get other countries interested in starting negotiations with the UK. They could easily conclude that there are other larger, faster growing markets which they have less access to that they would rather focus their diplomatic efforts on. (So far David Cameron trade missions haven't massively increased our trade outside the EU).

Where the "libertarians" might be slightly stronger ground is deregulation. Potentially companies can get better returns if internal regulations are removed and this has the upside of giving better returns for investor (and therefore arguably encouraging more investment and growth). The downside, however, is that such deregulation is likely to lead to worse employment conditions/wages and potentially damage to heath and the environment (which may offset any potential growth). Even if deregulation could enable growth there would be practical limits to far any deregulation could go. Potentially the level of deregulation required to offset trade friction could be significant. Its unlikely that radical deregulation would ever be supported by the UK electorate (in much the same way as there is limited appetite for radical socialism). In any case there would be a practical limits on how far an "independent" UK could deregulate as anything that adversely effected the environment or health (e.g. excessive pollution or the air or seas) could result trade sanctions under WTO rules.

Conclusions

In summary outside the the EU our policy options would be very limited. Implementing radical policies (either socialist or libertarian) are likely to be met by internal resistance from the UK electorate. Anything which distorts trade with the EU could lead to a strong counter-response to the detriment of UK exporters.

What would almost certainly emerge for a post EU settlement would be a fudge that would ultimately leave nobody very happy. Its easy to talk about what is wrong with the EU and even the UK's position in the EU. However, its difficult to see how that improvement would be attained for the UK by leaving the EU.

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